Domestic Wine Glut?? - - Not Anytime Soon

It was recently estimated that:

· 3 of every 5 bottles of wine sold in the U.S. are from California

· California produces 90% of all U.S. wine

· The economic impact of the wine industry to the State of California is $61.5 billion

· California has 4,600 wine grape growers, 543,000 acres of wine grapes

The California wine industry has trended steady to stronger over the past few years.  Medical research, indicating consumption of wine in moderation is healthful, has given the industry a boost.  Vintners have been more conscious in making wines that suit the American palate in many settings.  Events featuring wine and food pairings, cocktail wines, dessert wines and the like are more common now than in the past.  The industry’s message to the public is that wine is healthy, fun and affordable and it should be enjoyed by the common man (person).

Average grower return over the past 10 years has trended up gradually with the most significant increase in the past two years.  Data from the California Grape Crush Reports from 2003 to 2012 indicate average grower returns per ton for all winegrape varieties has increased from $533.60 in 2003 to $772.40 in 2012.

Average Grower Return per Ton - All Winegrape Varieties

Source:  California Grape Crush Reports - CA Dept of Food & Agriculture

     2003          2004          2005          2006          2007          2008          2009          2010          2011        2012

$533.60      $571.36     $583.20     $583.09     $564.89     $601.07     $612.03     $573.68     $637.35   $772.40

 

The prices were due in part to limited wine inventory in the past two years and the fact estimated total California winegrape acreage has grown less than 5% over the past 10 years.  The California Grape Acreage Report for 2012 also indicates there are only 38,000 acres of non-bearing grapes out of an estimated total of 546,000 California winegrape acres. 

California Winegrape Acreage (est)

Source:  California Grape Acreage Report - 2012 Crop

                                              2010                2011                2012

Bearing Acres                   497,000           506,000           508,000

Non-Bearing Acres            38,000             37,000             38,000

Total Winegrapes             535,000           543,000           546,000

The non-bearing acreage represents new plantings expected to come into production in the next few years.  For purposes of the Grape Acreage Report, the California Department of Food and Agriculture (CDFA) considers a planting non-bearing for three years, i.e., a vine planted in 2009 would not be considered producing until 2012.  This means the 38,000 non-bearing acres represents three years of plantings or approximately 12,600 acres being planted in each of the past three years.  That level of planting has been relatively the same since 2010.  At an annual replacement rate of 12,600 acres per year, it would take approximately 43 years to completely replace California’s winegrape vineyards.  That is beyond the life expectancy of most commercial winegrape vineyards, which is 20 to 25 years and under certain circumstances up to 30 years.  In other words, the California winegrape industry has not been in an expansion mode.  The lack of significant new plantings the past few years is most likely attributable to nervousness over poor general economic conditions.  The report indicates bearing acreage has increased the past three years, which may be giving an indication that growers with older, marginally producing vineyards are continuing to keep them in production because the recent higher prices enable them to exceed breakeven.  That strategy has been used for years and will continue, but eventually, vineyards handled in that fashion will decline to a point they are incapable of returning the cost of production.

Silicon Valley Bank has been a player in California wine industry financing since the 1980’s and has more recently published a “Wine Report”.  The most recent report covers their view of the state of the wine industry 2013.  It discusses the domestic wine industry, but also explores general economic conditions as well as global influences.  They generally agree with comments above regarding the domestic supply side of the equation for the wine industry.  However, pricing pressure will come from imported wines and lingering evidence of the distressed economic conditions domestically and globally.  Having said that, they feel financial strength of the US Wine Industry is improving and wine sales will continue to expand, just not at the rates seen in the past, when economic conditions were more favorable.

The consensus is that California growers will continue to receive high prices for their grapes in the near term.  Prices will most likely hover around 2012 levels as wineries work to keep their input costs under control.  Longer term, grower prices will depend on new plantings.  As noted earlier, it will take three years to see new plantings come into production.  So, it will be some time before domestic over-production could become a factor.

Domestic wine consumers still cautious about economic conditions are holding back on their purchases of premium and ultra-premium wines while lagging foreign economies keep the USD strong against foreign currencies.  Wineries that purchase grapes to produce wine will see pressure on their profits.  Global wine production and economic conditions are also a factor.  The strong dollar makes it more economical to import foreign goods, including wine.  The effect of foreign imports is expected to impact mid to lower priced wines the most.  Wineries will focus on expansion of their direct sales and niche markets, their most profitable market channels.  It is expected wine sales will continue to expand in the 4% - 8% range, which is less than in the past few years.  Wineries will take advantage of that growth and continue to be profitable.

Wine prices in the US will most likely continue to increase over the next two or three years.  Imports will be a factor, but with predictions of a strengthening global economy, imports will remain in a reasonable balance.  New domestic vineyard plantings in the next couple of years will reveal the course of  the supply / demand equation in the longer term.

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Robert Wenger has worked in banking and real estate finance since 1972, serving clients in California, Oregon, Nevada, Utah, Arizona, Colorado, Kansas, Nebraska and Hawaii.  During his career, Mr. Wenger has been responsible for originating and servicing agricultural loans and managing over 100,000 acres of agricultural property for an insurance company, managing a $450 Million special asset portfolio for a niche lender and managing special assets and loan operations at three community banks.   Mr. Wenger is a California real estate broker and has provided expert witness services in the areas of banking, real estate finance and agriculture for the past 10 years and has instructed home buyer education classes for the past 7 years.

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